The Journal. - The Missteps That Led Nike Off Course

Episode Date: October 3, 2024

Under CEO John Donahoe, Nike pulled away from retailers and ramped up production of its classic sneaker lines. Now sales have plummeted, the company has lost market share to competitors and Donahoe is stepping down. WSJ's Inti Pacheco discusses what went wrong. Further Reading: -Nike CEO John Donahoe Stepping Down After Rocky Tenure  -How Nike Missed the Boom in Running Culture  -Nike Reverses Course as Innovation Stalls and Rivals Gain Ground  Further Listening: -Nike’s Sneaky Sneaker Thieves  -How Allbirds Lost Its Footing  Learn more about your ad choices. Visit megaphone.fm/adchoices

In 2020, John Donahoe became CEO of one of the most storied sports brands in the world, Nike. And he came to the job with one mission. To not screw it up. I think those were his words. That's our colleague Intipacheco. He covers Nike. When Dada Ho took the helm, achieving that mission of not screwing it up seemed simple

because Nike was doing really well. Sales were growing. You know, they had this goal to reach $50 billion eventually, and it was happening. Like, you could see the trajectory that it was going. It would reach those 50 billion very soon. Three years into Donoho's tenure, Nike achieved that goal. But then shortly after, the company took a turn for the worse. Now sales have plummeted.

Nike has lost its cool factor. And John Donahoe is stepping down. So really, what went wrong? A lot. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Thursday, October 3rd. Coming up on the show, how Nike lost its way. Courage. I learned it from my adoptive mom.

Hold my hand. You hold my hand. Learn about adopting a team from foster care at adoptUSkids.org. You can't imagine the reward. Brought to you by AdoptUS Kids, the U.S. Department of Health and Human Services, and the Ad Council. Department of Health and Human Services and the Ad Council. A few months ago, John Donahoe sat down with Inty. Hey. Hey. Hi, Inty. I'm John.

Nice to finally meet you. Nice to finally meet you, too. Hey, Jay. Inty wanted to ask Donahoe about the struggles Nike was facing. But they started the conversation talking about Donohoe's basketball obsessions and his leadership style. To me, my role models have been head coaches. Phil Jackson, right? John Thompson, who I was fortunate enough to serve on the Nike board with. Coach Kay and then Tara Vandiver, the two winningest coaches in college basketball history,

And then Tara Vandiver, the two winningest coaches in college basketball history, men's and women's. It's not about the coach. It's never been about me. It's about your players. And when you have a win, it's about the players. And when you have a loss, you say it's on me. Right now, Donahoe's facing a loss as the coach of Nike. When he joined the company back in 2020, he seemed primed to bring a big win.

Nike has typically been led by company insiders, people who knew the culture and the staff and who spent most of their careers there. Donohoe was not that. He had consulted with Nike in the 90s and been on the board since 2014. But when he took over as CEO, he came as someone with a different kind of background. He'd previously run eBay and a cloud computing company. And that tech experience is exactly what Nike said it wanted.

He was there to turn Nike, in theory, into a tech company, try to harness all the data that the company was getting from consumers through their apps to try to translate that into more sales for the company. Even though they sell footwear and apparel, the idea was to really use that data, really use all their digital channels to sell more of those things to people. Was that the mandate that was given to him when he stepped on? It was a mandate that was given to him.

Actually, yeah, when they announced that John Donahoe was joining the company, it was former chief executive Mark Parker who said that Donahoe was the perfect person to lead Nike into this digital transition that they had been planning for a while. Donahoe moved quickly to make that transition to digital happen. One of the major decisions he made was to lean heavily on the digital side of the business, which means how Nike sells to consumers through its website and its apps. Donajos saw projections that led him to believe that half of Nike's revenue would come

through those digital channels. So he thought that Nike could make more money if they sold more directly to consumers through those channels. This was in 2020, at the height of online pandemic shopping. Online sales are up 70%. Has the lockdown changed consumer spending for good? Nike shares popping after hours of strong online sales

helped the company top revenue estimates. The company's conference call. Those sales numbers seem to be proving Donahoe's strategy right. Here's what he said to Inti about that period. We grew through this period of time. that the strategy was the core part of the strategy was basically working. Our digital business exploded during that period of time. Now, to be honest, consumers were shopping from home

because retail was closed or they were tentative to go out in physical retail. But we had the two best retail or mobile apps in the industry with the Nike mobile app and the sneakers mobile app. Yeah. And mobile went from... As he pushed harder towards digital, Donahoe pulled back from brick and mortar stores. Nike broke up with some of its major retail partners, like DSW and Macy's, and it started sending less product to Foot Locker, all with the goal of getting as big a chunk of the profit as possible.

You say, I'll cut the middleman, right? Because if I sell to the middleman, I got to sell it at a reduced price. I'm not making as much of a profit. And so that's what Donoho pushed for. There were some at Nike who warned Donoho that he was overcommitting to the direct-to-consumer approach. They suggested going slower. But Donoho forged ahead.

The company invested heavily in consumer insights and data analytics to better understand what customers wanted. It hired thousands of new staff to help drive the push. Donoho also looked at the data around Nike's classic sneaker lines, Air Jordan's, Dunk's, and Air Force One's. And he saw that those sneakers were big sellers and were making Nike the most money. So the company started making way more of those shoes. They released an incredible amount of versions of the Air Jordan 1, the Dunk, and the Air Force 1. And they kept talking about it, you know,

during earnings calls, when the executives are giving results to investors, they kept saying, like, these are three cash cows. Executives were excited about these sneakers bringing in so much money. And at first, sneaker fans were also pumped about the new kicks. By the summer of 2022, people who are into sneakers all of a sudden said like, wow, this

is very cool. They're releasing so many different versions of, I don't know, the Jordan Force. So it meant on the one hand that Nike was selling a lot of it because those were always considered like limited edition releases. And those sell for like $200 a pair. So it means that the company is making a lot of money and because of the demand, it means that they sell out very quickly. But now that kind of backfired. The worst sneaker release of all time.

And a dump man. Canada Dunk, man. Oversaturated? Oversaturated like crazy. Every time they get something good for the last, what, 10 years now, it's like, bro, they just spam it. They sold so many shoes that people had enough. Like, it's that simple. You don't see people get tired.

The market became flooded with these sneakers. Part of the appeal of these shoes was the fact that they were exclusive, and now that everyone could get their hands on them, they started to lose their cool. And doubling down on these re-releases of older shoes also meant that Nike wasn't making a ton of new or innovative shoes. And that innovative spirit was what Nike was known for, especially around running sneakers. And at Nike, we're putting that knowledge to work,

making shoes that actually help athletes to run faster and safer. Nike's co-founder, Phil Knight, was a track athlete. The company initially sold its products directly to runners at track meetings across the Pacific Northwest, where Nike is based. And that face-to-face appeal was part of its strategy for decades.

But during Donoho's tenure, running wasn't a focus. Inti says that if you go out for a run, you'll probably notice. I went to Portland, Oregon earlier this year, and I met with a runner, and she was telling me about her run club. Then she started telling me about how brands showed up all the time to like raffle products, like sneakers, and it's like a party. And they kept telling me

that all these brands were showing up except for Nike. And you know, Nike is from Oregon. So it was pretty weird that I kept hearing that. And that's when I think I noticed that, oh no, this is like real. They've lost a significant portion of the running category to other brands. Of course, a lot of people are using Nike, but you can see it also in their sales. I think in their annual sales report, Nike shared that they actually sold 7% less pairs of shoes than they did last year. Which suggests that these other brands are sort of like chipping away at their market share. Well, I mean, those other brands like Hoka, On, New Balance, they're growing.

They're not declining. So somebody is getting that 7% chunk that Nike lost. Executives at the company have acknowledged that they've lost ground in the running category. So Nike had lost its connection with the running community. It had become uncool to sneakerheads. And it had hurt its connection with the running community, it had become uncool to sneakerheads, and it had hurt its relationships with retail partners. Things weren't going well for Donahoe, and they were about to get worse.

That's next. By December of last year, Nike needed to cut costs by $2 billion, and Donahoe announced that they would lay off about 1,600 workers. In February, a month before the layoffs were set to begin, employees were on edge and morale was low. So Donoho called the virtual all hands. 20,000 employees logged onto the Zoom call as Donoho spoke. When Donoho started talking about accountability,

saying that he and his team held themselves accountable for all the mistakes that had happened at the company. Somebody in the chat said that if they were really holding themselves accountable, why didn't he give himself a salary cut? Another chimed in, typing, quote, accountability. I do not think that word means what you think it means. And then people started, you know, like adding the laughing emoji.

They were criticizing his ability to be a leader. They were criticizing all the decisions that he made. And someone said, I hope Phil Knight is watching this right now. I think that was very indicative of how people were feeling. I'm that was very indicative of how people were feeling. I'm talking about dozens of people writing comments like this in a very public chat that

is monitored by human resources. So it was a very brave and risky thing to do. Yeah. It feels like the kind of thing you do when you feel like you don't have very much to lose anymore. It was literally like a protest, like an online protest against the CEO of the company that you're employed by. When Inti sat down with Donoho a few months ago, he asked him to reflect on that disastrous all hands. There was that episode of the Zoom call and I just wanted to, you know, hear from you,

like, how does that make you feel, and do you need to address it? One of the things that I think is special and unique about Nike is how much our employees love sport and how much they love Nike. And just like in a locker room of a sports team, people have different opinions. And so we welcome and encourage that. Our employees have been through a lot, we've had this growth, and we're going through a period of adjustment.

And so anytime there's uncertainty, it creates anxiety and concern. And I understand that, our leadership team understands that. Yeah. It's a challenging time on that front. We're trying to communicate as clearly as we can. By the time of the All Hands, Donahoe already

had plans in motion to change strategy. He was busy rebuilding relationships with retail partners and pulling back on digital sales. The company was also scaling back on the production of its classic sneakers and trying to reconnect with the running community. But unfortunately for Donoho, it was too late. Were there any signs that this effort from Donoho, this sort of change in

strategy was just not going to be enough and that Nike was thinking about getting new leadership. I think there was a sign and sources have mentioned this before, but Nike co-founder Phil Knight came out and said that Donahoe had his unwavering support, which was a very rare show of support. That's interesting. Why would a show of support be a bad sign? Because Phil Knight basically doesn't speak on the record. It's very rare that you see a public statement from the founder of Nike. And then what some people told me was that if you need to have the founder of the company

come out and say something good for you while the company's delivering bad results, then there's probably something off. At the end of last month, Nike announced that Donahoe would be retiring. In a statement, he acknowledged that, quote, it became clear now was the time to make a leadership change. In his place, a Nike alum named Elliot Hill is set to take over. In a video to employees, Hill talked about what he thinks the team should focus on. First, we have to win now.

We need to be serving the consumer, activating our offense, and making sure that we're delivering results while we're setting ourselves up for the future and our future success. Are there any lessons that Nike can take from Donahoe's tenure? I think for such a big company, it's difficult to make very harsh decisions without having to potentially face really harsh consequences. They're going back to a guy like Elliot Hill

because they want an insider. They don't want another outsider. Very few people have been at the helm of Nike and it's like a big deal internally for the world because it's one of the biggest brands out there. This week, Nike released its latest earnings, showing the steepest quarterly drop in revenue the company has seen since the pandemic.

Profits plunged 28% compared to last year, and sales fell another 10%. So what's the path forward for Nike? Can it bounce back or has it lost too much ground? This is an increasingly fragmented industry where there are more competitors, people, investors, retailers, and consumers, shoppers. Everyone's expecting Nike to deliver something new and great that will be memorable with the storytelling that always comes along with it. And you know I think for them to

do design something for an athlete that is actually useful for sports and then actually becomes ubiquitous would be the definition of success. Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.